FMC raps NCDEX on fall in SGF, violation of rules

The Forward Markets Commission (FMC) has taken a serious note of the mismanagement of financial affairs and diversion of funds made by the National Commodity & Derivatives Exchange Ltd (NCDEX) in the dealing and utilisation of the Settlement Guarantee Fund (SGF) which has violated regulatory rules.

The regulator also noted that NCDEXs SGF had slipped below the minimum amount of Rs 5 crore as prescribed in the exchanges own bylaws. The fund size was reduced to just Rs 5.05 lakh as on December 31 from Rs 24.87 crore between March 2004 and March 2006.

In a 20-page document released by FMC on the transaction charges levied by the exchange, it has examined the issue of reduced transaction charges and said in its finding that transaction charges may make only marginal difference in the choice of the exchange as far as market participation is concerned. The drastic cut in transaction charges cannot by itself bring an substantial jump in the volumes as expected by the exchange.

The commission has also rejected the two likely scenarios given by the exchange that could increase the volume of the exchange. Firstly, that the exchange was able to attract new clients who were so far not present in the market. Secondly, that the exchange was able to attract clients of other exchanges in the evening hours which would result in an increase of 30%-35% of the average daily trade value, i.e. 200% growth in turnover of the exchange in the evening hours.

First of all, expecting a 200% rise in volume only on the strength of reduced transaction charges is highly impractical. Secondly, it would be incorrect to presume that such a potential shift in volume would go without any retaliatory action from competitors, said the regulator.